US mortgage rates have declined for the first time in six weeks, as recent employment and inflation data signal a cooling labor market and suggest the impact of the Iran conflict on July inflation may be less severe than initially feared. This has reduced market expectations for a near-term Federal Reserve rate hike. However, mortgage rates remain at their highest levels in over a year, with high borrowing costs continuing to weigh on housing demand.
According to data released by Freddie Mac on Thursday, the average rate on a 30-year fixed-rate mortgage edged down to 6.67% from 6.69% the previous week, breaking a streak of five consecutive weekly increases. Despite this dip, current mortgage rates are still elevated compared to the past year. Recent inflation data has somewhat alleviated concerns that the Iran conflict could push up US prices. US inflation in July slowed for the second consecutive month, with prices for energy, gasoline, and groceries declining from the previous month. Another measure tracking core inflationary pressures fell to a five-year low, matching the level seen in February of this year, indicating that the conflict's impact on overall US inflation remains relatively limited.
Meanwhile, the July employment report showed weaker hiring than previously reported data, with an unexpected decline in the number of jobs added. The simultaneous cooling of both employment and inflation has eased the pressure on the Federal Reserve to implement further rate hikes in the coming months. According to the CME FedWatch Tool, following the release of the July Consumer Price Index (CPI), the market probability of a 25-basis-point rate hike at the Fed's September meeting dropped to 38% from 48% the previous day. Nonetheless, Joel Berner, Senior Economist at Realtor.com, believes that the scope for a significant further decline in mortgage rates may remain limited. On one hand, the Middle East conflict continues to pose upward pressure on inflation; on the other hand, the Fed remains highly focused on pushing inflation lower. He predicts that current mortgage rate levels could become a more common state for the market in the coming months.
The Middle East situation remains a key uncertainty influencing US interest rates and the inflation outlook. Negotiations between Tehran and Washington over the Strait of Hormuz remain deadlocked, keeping international oil prices elevated. The International Energy Agency (IEA) projected in its latest monthly report that the global oil market will face a supply deficit of 1.8 million barrels per day in the current quarter, more than double its previous forecast. Brent crude oil is currently trading near $87 per barrel, after falling below $80 in early August.
Persistently high mortgage rates and economic uncertainty are further dampening US housing demand. Redfin data shows that US home sales fell 4.1% month-over-month in July, reaching a seasonally adjusted level near the lowest in two years. At the same time, a large number of US homeowners who locked in historically low mortgage rates during the pandemic are now reluctant to sell their existing homes and take on higher financing costs, which continues to constrain housing supply. This "lock-in effect" is also keeping US home prices elevated despite weak demand. According to the National Association of Realtors (NAR), the median sales price for existing homes in July reached $434,100, up 2% year-over-year, still near the record high. Chen Zhao, Head of Economic Research at Redfin, noted that many Americans already find it difficult to afford housing costs, while other potential buyers are delaying purchases due to concerns about the economic outlook.
Overall, the cooling of employment and inflation has pushed US mortgage rates to end a five-week rising streak, but the 30-year fixed mortgage rate of 6.67% remains at a relatively high level. Given the uncertainties surrounding the Middle East conflict, elevated oil prices, and the Fed's policy outlook, the potential for a sharp near-term decline in mortgage rates appears limited. The US housing market continues to face multiple pressures from high financing costs, elevated home prices, and insufficient supply.
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